These days it seems nothing can stop gold, not even the Federal Reserve. Gold continues to hit new highs as an increasingly uncertain world has more people turning to the safe haven asset, so much so that its performance has largely shaken off rising bond yields to which it has historically maintained a positive correlation.
U.S. benchmark rates are hovering at 5.25 to 5.50 as of May and, after recent consumer price index (CPI) reports, they are now unlikely to meet expectations for three cuts in 2024. The first such cut was initially forecast to happen in June but the FedWatch Tool by CME Group is now indicating that the cut might happen in September.
Counter-Trend: Gold and Rates
"With rates where they are, they should really be hurting gold," said Bob Iaccino, Chief Market Strategist, Path Trading Partners. "This tells me that the bid behind gold is not just interest rates, as these are being pushed back, but more a function of geopolitical tensions.”
Iran, for instance, launched an attack on Israel on April 13, adding to the conflict in the Middle East. This, coupled with the ongoing Russia-Ukraine war and increasing tension between China and Taiwan, demonstrate that there are lingering concerns that could rattle global markets and boost gold's safe haven status.
Gold's recent decoupling from yields shows the metal is increasingly being used as a trusted indicator for long-term uncertainty as opposed to yields which have become more of a near-term gauge for where rates could head, according to Thomas Hart, senior director of precious metals at CME Group.
"When gold made its latest all time high last December, it was following the historical yield convergence as the market expected six rate cuts instead of perhaps none now," explained Hart. "But it has been doing the opposite since the start of the year as the outlook for rates turns murkier."
Gold Remains Reliable
"We are seeing things like stagflation, high deficits and geopolitics in multiple different fronts as bigger causes of uncertainty than rates," Hart continued, noting that the market is seeing gold as reliable regardless of the scenario.
CME Group's smaller-sized precious metals contracts – the Micro Gold futures and Micro Silver futures – saw average daily volume (ADV) of 64,949 contracts and 8,167 contracts in Q1 of 2024. April ADV for both Micro Gold futures and Micro Silver futures was up 119% and 162% month over month, representing the second highest monthly ADV since the products were launched.
This buoyant demand for gold and other precious metals has not been lost on commodity traders who are pushing the exchange's Micro Gold futures and Micro Silver futures to fresh highs.
"We have seen a significant uptick in micro contracts," said Hart, adding that similar volumes were last experienced in summer 2020. "While silver doesn't necessarily speak to rates, you are starting to see silver play catch up with gold…as it's developing safe haven properties and isn't just seen as an industrial metal anymore."
Gold’s Rising Popularity
Beyond gold futures, people are also accumulating physical gold in droves. The U.S. discount retailer Costco is selling 1-ounce bars made of nearly 24-karat bullion, raking in $100 million to $200 million monthly and diversifying its revenue streams, according to Wells Fargo analysts. The bars, which feature intricate designs of the Lady Fortuna Greek Goddess of good fortune, are being sold for around $2,000 each, are non refundable and capped at five per Costco member.
Amid such a buying frenzy, Iaccino expects other retailers will follow suit as demand for gold appears unrelenting. "I think hoarding gold bars has to do with people trusting retailers and people trust Costco," said Iaccino. "People have been wanting more physical gold rather than ETFs."
Factors Influencing Gold’s Rally
The new, post-pandemic era has brought an unprecedented amount of uncertainty that has made bullion (and even silver, which hasn't traditionally been perceived as a safe haven) increasingly attractive. What’s next for gold remains to be seen, but a variety of factors could influence its ability to continue its rally.
“Investor sentiment, geopolitical stability, currency values and other macroeconomic factors that influence demand can drive this appreciation of gold,” writes Iaccino on gold’s role in turbulent times. “Furthermore, the global nature of gold markets means that while the Federal Reserve's policies are influential, they are not the sole determinants of gold prices.”
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